World Review of Business Research
Vol. 4. No. 2. July 2014 Issue. Pp. 61 – 73
Risk Management Practices for Short-Term Insurance in
Zimbabwe
Batsirai Winmore Mazviona*
The study examined the current risk management practices of insurance companies
and revealed that the risk management practices are not adequate. The objective of
the study was to document the risk management practices in the short-term
insurance industry. The key features investigated are risk management culture, risk
control and extreme event management. A questionnaire was used as a research
instrument for data collection. Closed questions were structured on a five point
Likert-scale. A total of eighty six questionnaires were sent to short-term insurance
companies. Purposive sampling was used to come up with research participants.
The research participants comprised of claims processors, credit controllers, interns,
managers and underwriters in the short-term insurance industry. The study period
was from February 2013 to May 2013. The analysis was carried out in SPSS 16.0.
Additionally, secondary sources which include journal articles were used to
supplement the primary data. There is poor risk management culture in short-term
insurance companies. The results show that the risk management practitioners in the
Zimbabwean short-term insurance industry are not appropriately qualified and
management does not view risk management as a tool that can provide their firms a
competitive edge. Insurance companies have measures in place to manage high
frequency low severity events, however have no measures in place to envision and
manage low frequency high severity events. The implications of these findings are
that, for a new approach like Enterprise Risk Management (ERM) to succeed there
has to be a paradigm shift in the Zimbabwean short term insurers’ approach to risk
management the first being to strengthen their risk management culture. The efforts
to adopt ERM must start in the board room and the short term insurance companies
should integrate risk management into their organisation’s objectives, philosophy,
practices, and strategic plans.
1. Introduction
ERM is a topical issue (Connell 2007). Various terms have been used to describe ERM
including holistic, integrated, strategic and the most widely used and generally accepted
terminology is ERM. Since its inception, ERM has gained a large momentum in risk
management literature and many researchers have provided insights of how ERM
enhances firm performance and results in the maximisation of shareholders’ value (
Nocco & Stulz 2006; Hoyt & Liebenberg 2008; Yow & Sherris 2008; Pagach & Warr
2010; Grace et al., 2010; Eckles, Hoyt & Miller 2011). However, ERM is still very narrow
in insurance industry although it is aimed to increase the stakeholders’ value (Acharyya
2008). Golshan and Rasid (2012) state that, not many firms have adopted ERM
although there is a lot of evidence that ERM is known as a tool to increase
shareholder’s value and further add that ERM is a new financial tool to manage risks
evolving inside and outside the organisation. Subhani and Osman (2011) in their study
found that there are very few enterprises from developing nations which are
implementing ERM while developed nations’ enterprises are huskily and vigorously
involved in it. It is sad to note that, many insurers are still far from an optimal level of
risk management and financial intermediation activities (Jabbour 2011). The failure of
_______________________________________________
*Mr. Batsirai Winmore Mazviona, National University of Science and Technology, Department of
Insurance and Actuarial Science, Bulawayo, Zimbabwe. winmoreb@gmail.com
Mazviona
the Zimbabwean insurers to develop and implement sound risk management programs
may result in insolvency which could weaken and destabilize the financial environment.
Insolvency affects the interests of policyholders adversely. Therefore, insurance
supervisors should ensure that insurers are properly addressing their risks through
sound risk management programs. Duru (2013) reported "in view of the ever-evolving
nature of the macro-economic and regulatory dynamics of the industry's operating
environment, the need for regular and periodic evaluation of the effectiveness of the
company's ERM process and internal controls cannot be over-emphasised; hence, the
adoption of the framework”.
Insurance is merely a sale of a promise to the policyholder or insured. The effectiveness
of an insurance policy is seen when a claim occurs. Insurers are supposed to meet the
obligation or promise it pledged at policy inception following a claim event. Lack of
sound and proper ERM in insurance companies may result in insurers failing to pay
claims at all or delay of payment. ERM is a new concept and as such no documented
study has been carried out in the Zimbabwean environment. The results of this study
are new and set a basis for comparison in future studies on ERM in Zimbabwe. The aim
of the study was to find out the current risk management practices for short-term
insurance industry in Zimbabwe. The study is motivated by the need to come up with
sound ERM in the short-term insurance industry. The findings in this article go a long
way in complementing the current regulatory mechanisms in the insurance sector.
The significance of the study is in two fold. Firstly, it makes use of primary and
secondary data to get insight of the ERM in Zimbabwe. Hence, adding to the existing
body of knowledge in risk management. Secondly, it provides various stakeholders that
include regulators, insurers, reinsurers and the insured with current risk management
practices in the Zimbabwean short-term insurance industry. The knowledge will assist
them when making sound and well-informed decisions.
The article is organised as follows, section 2 reviews the literature in risk management,
section 3 presents the methodology employed in this study, and section 4 provides the
findings. Section 5 gives a summary of the findings and recommendations to various
key players.
2. Literature Review
Risk management is traceable to the late 1940s and early 1950s and started as a so
called silo-based approach to corporate risk management until the mid-1990s (Kraus &
Lehner 2012). Traditionally risk management (TRM) in insurance companies is done in
a silo structure (Acharyya 2008). A silo structure is an organizational set up whereby
each operational activity is generally undertaken independently and, frequently, so too
are the risks generated by those activities. Hoyt and Liebenberg (2008) argued that
there are disadvantages to the traditional silo approach to risk management. Managing
each risk class in a separate silo creates inefficiencies due to lack of coordination
between the various risk management departments. Ratcliffe, Samer and Langer (2009)
assert that TRM is often focused on risk identification, assessment, diversification and
mitigation of predominantly operational risks. In TRM, risk identification means looking
at causes and consequences, but with strong focus on management of specific risks
only. There is divergence of interests between operational and investment departments
in insurance companies. The divergent emanates from the risks of concern. Pure risk
(downside) is of concern to the operational department while the investment department
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tend to focus on speculative risks which are downside and upside risks in nature
(Acharyya & Johnson, 2006). Calandro and Lane (2006) highlight that, in simpler and
less volatile times the silo organisational structure provided a workable frame work in
which to conduct the business of insurance. Ratcliffe, Samer and Langer (2009) further
argue that with TRM, it is not possible to manage strategic risks properly and to answer
questions about mergers and acquisitions, major hedging strategies or entering into
new lines of business. TRM is weak as it tends to focus on the downside, whereas
strategic risk management is about optimum capital deployment which includes the
upside as well. The International Actuarial Association (2008) states that the terms risk
and risk management are commonly viewed through a lens of avoiding bad things
happening and limiting the downside. However, a more enlightened view emerging is
one of connecting risk to value maintenance and creation. Protiviti (2006) reached a
similar conclusion that under TRM management the process is fragmented and risk is
viewed as a negative (something to be avoided) reactive and ad hoc behaviour.
Moreover, risk management is transaction oriented (or cost based) narrowly focused
and functionally driven. TRM model is focused on managing uncertainties around
physical and financial assets. The TRM concept is being perceived as an approach
which is rather limited in terms of scope and application (Hussin 1996). The short
comings of TRM have driven the popularity of ERM. ERM is a structured and disciplined
approach which aligns strategy, processes, people, technology and knowledge with the
purpose of evaluating and managing the uncertainties an enterprises faces and hence
creating value. ERM signifies that a comprehensive approach to risk management is
undertaken by looking at a portfolio of risks that enables processes to align with the
company’s strategy and involves employees at all levels of the organisation (Deloach
2000). The problem was not answered by past studies particularly in the Zimbabwean
short-term insurance context. This is due to lack of documented studies on ERM in
Zimbabwe. This study endeavoured to close the knowledge gap on risk management
practices in Zimbabwe short-term insurance industry. There are no limitations and
problems since there is no previously particular study on risk management practices in
Zimbabwe.
2.1 Components of ERM
The major components of ERM are risk-management culture, risk controls, extremeevent management, risk and capital models, and strategic risk management (Standard
and Poor 2005). In the committee of sponsoring organisations of the treadway
commission, COSO (2004) framework the components are split into eight categories
which are: internal environment, objective setting, event identification, risk assessment,
risk response, control activities, information and communication and monitoring. COSO
(2004) points out that ERM is not strictly a serial process, where one component affects
only the next. It is a multidirectional, iterative process in which almost any component
can and does influence another. The ERM components are explained in subsequent
sections.
2.1.1 Risk Management Culture
The International Actuarial Association (2008) views culture as behaviour of people in
an organisation, how they think or do things in an organisation which is shared by most
of its members and must be learnt by all those who join an organisation if they are to
make progress. The International Actuarial Association (2008) stipulates that all
organisations have a risk management culture but the only issue is whether it is
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supporting the appropriate goals, activities, outcomes and mitigating risks of not
achieving desired outcomes. Furthermore, culture can be learnt, shared and
transmitted, and is reflected in the values, norms, beliefs and practices of an
organisation. The International Actuarial Association (2008) further argues that cultural
and behavioural characteristics of risk management will invariably be unique to an
individual insurer, whether they be small, medium or large, reflecting the history, values
and style of the insurer. The absence of a supportive culture will undermine the most
sophisticated of ERM frameworks. Standard and Poor (2005) states that risk
management culture is the degree to which risk and risk management are important
considerations in all aspects of corporate decision making and the risk management
culture must encompasses the policy dimensions of ERM. They further point out that
the main aspects of a risk management culture are the company's philosophy toward
risk and its risk appetite, governance and organizational structure of the risk
management function, risk and risk management external disclosures and internal
communications, and the degree to which there is broad understanding and
participation in risk management across the company. Risk management culture means
that everybody who works in a company thinks about the risk that they are bringing into
the company with their actions (Santori 2009). In an insurance company it can be in
pricing, reserving and underwriting. Additionally, it could then be argued that in a
company with effective ERM, the concept of risk should be well spread across the
company and the company needs to have and be able to state a clear risk tolerance
that is tied to the risk limit.
2.1.2 Risk Controls
Risk control entails any activity that is aimed at preventing losses, the minimising the
consequences of losses that may arise from any risks facing an organisation and the
handling of an adverse event in advance or as it occurs. Santori (2009) states that the
company has to identify all its main risks, monitor risks and to keep them within the
stated limits. The objective of risk limits is to ensure that risks produce losses that are
within tolerable and control processes. The limits have to be applied to all the risks of
the insurance company. However, effective risk control requires a well-supported risk
management programme.
2.1.3 Extreme-Event Management
Extreme event management is concerned with the impact of low frequency adverse
events which cannot be easily managed by control processes because the monitoring is
not expected to show any results in most periods (Standard and Poor 2005). Santori
(2009) suggests asbestosis as an example of an extreme event of the past and
electromagnetic fields and terrorism as emerging risks. Standard and Poor (2005)
asserts that a good risk management program includes a process of envisioning the
impact of living disasters through stress testing and scenario analysis. Moreover, this
would evaluate the potential impact on the company’s reputation, liquidity and overall
financial strength of specific catastrophic events.
2.1.4 Risk and Capital Models
Standard and Poor (2005) notes that for most of the credit, market, and insurance risks,
the degree of exposure to risk is not readily apparent from the company accounting
system. Indicative, predictive, and sensitivity risk measures need to be used to monitor,
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control, and manage risk exposures. Indicative measures are obtained from information
that might be directly available from the accounting, administrative or underwriting
systems. Indicative measures give a broad indication of the trend in risk such as
probable maximum loss, premiums earned, asset values, staff turnover rates and audit
exception reports. Predictive measures are estimated using complicated and powerful
simulation models. Predictive risk models usually directly or indirectly presume that the
future is probabilistic and that risk can be measured as the loss that arises under a
certain probability or other criteria. ERM requires that there is monitoring of all important
risks, and it is therefore considered preferable to have a monitoring system based on
indicative measures rather than have no monitoring of a significant risk (Standard and
Poor 2005). Standard and Poor (2005) further asserts that economic capital is the
amount of capital that is needed by an enterprise to provide support for retained risks of
a company in a severe loss situation. Sweeting (2011) agrees with this view and states
that economic capital is the additional value of funds needed to cover potential
outgoings, falls in asset values and rises in liabilities at some given risk tolerance over a
specified time horizon and that economic capital is calculated using an economic capital
model, which is a type of risk model. The economic capital model is used to create
simulations of the future financial state of an institution so that the range of potential
outcomes can be analysed. The potential outcomes are then used in the calculation of
some measure of risk that allows for an assessment of the level of capital that should
be held, given a pre-specified risk tolerance and time horizon. The International
Actuarial Association (2008) notes that the purpose of an economic capital model
(ECM) is to provide a holistic assessment of the key risk drivers within an organisation
and to devise risk management techniques to address these risks. An ECM generally
comprises integrated asset and liability models and simulates the outturn of asset and
liability cash flow experience over future periods (International Actuarial Association
2008). The typical output from an economic capital model comprises forecast future
balance sheet, profit and loss accounts cash flow statements, and projected
distributions of profit; capital and return on capital.
2.1.5 Strategic Risk Management
Santori (2009) views strategic risk management as the ability to measure all risks with
one unique measure, deciding on a measure of profitability, and then to compare every
action or every risk with this measure of profitability or measure of risk so that the
company can choose, for a given level of risk, the most profitable business or vice
versa. Santori (2009) further highlights that even in strategic risk management,
economic capital models play a very important role. The role is attributable to the
company’s needs to have a consistent view across all its risks. The view enables a
choice to be made for an overall strategic risk management which is effective in
providing a competitive advantage following an ERM program.
3. Methodology
The purpose of the study was to find out the risk management practices by short-term
insurance companies in Zimbabwe. A total of eighty six questionnaires were used in this
study. The research participants comprised of claims processors (17%), credit
controllers (5.7%), interns (9.4%), managers (18.9%) and underwriters (49%). Among
the participants 64.2% and 35.8% are males and females respectively. The research
instrument employed in this study was a questionnaire with closed questions based on
the five point Likert scale. A pilot study was done to test the research instrument and
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refine it for easiness of answering it. The research instrument was used to collect
primary data. Secondary data in the form of journal articles and other documented
evidence were used to complement the study. The target group was short term
insurance companies and the sample size was eight six. Purposive sampling was used
because the research participants are practising in the short-term insurance industry
and hence the required data could be easily obtained. The study period was from
February 2013 to May 2013. A summary of descriptive statistics and a t-test were
presented to establish the risk management practices of short term companies in
Zimbabwe. The study has added new knowledge about risk management practices in
short-term insurance industry in Zimbabwe. There was no previously documented
evidence on risk management practices in Zimbabwe.
4. Findings
Table 1 shows the reliability coefficients based on the Cronbach Alpha, they range from
good to excellent with the exception of the extreme risk management.
Risk Management
Culture
Risk control
Extreme event
management
Benefits of ERM
Table 1: Reliability statistics
Cronbach’s
N of Items
Alpha
.919
11
.856
.605
5
2
.760
7
4.1 Current Risk Management Practices in the Short Term Insurance Industry
The sets of questions sought to understand the risk management practices of the short
term insurance companies. Three main sections were looked at namely; risk
management culture, risk controls and extreme event management.
4.2 Risk Management Culture
In understanding the risk management practices of a company it is important to know
the risk management culture because it is people who manage the risk. People
throughout the organisation should be aware and have knowledge of risk management
practises in the organisation. As such there are various aspects that make up the risk
management culture in an organisation. The respondents were asked questions on
these aspects. According to Table 2, the respondents perceived only two elements of
risk management culture as having high need for corrective action in their
organisations. Amongst the elements, it was found that the risk management staff in
organisations should be highly and appropriately qualified (mean =3.47) and that
management should view its risk management capabilities as providing a competitive
edge (mean =3.40). All the other items obtained a neutral mean score. However,
because looking at the mean alone tells part of the story it is important to consider the
distribution of the responses. The standard deviation provides a valuable descriptive
measure of this. Two very different distributions of responses to a 5 point rating can
yield the same mean, for example in Table 2, responses for question 4 and question 5.
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It is important to note that standard deviation does not indicate right or wrong or better
or worse, a lower standard deviation is not necessarily more desirable. It is used purely
as a descriptive statistic. It describes the distribution in relation to the mean. The
standard deviations of the majority of the items are slightly greater than one, which
indicates that the individual responses on average, were a little over one point away
from the mean.
Table 2: Risk management culture
Mean*
7) Risk management staff is highly and 3.47
appropriately qualified.
12) Management views its risk management 3.40
capabilities as providing a competitive edge.
13) Insurer actively learns from mistakes and loss 3.25
situations. Policy and procedural changes are
made to improve future risk management.
8) Risk management objectives are highly 3.23
coordinated with business line goals.
6) Board regularly receives, discusses and 3.13
understands reports on risk positions and the
company's risk management programs.
9) Company incentive compensation supports the 3.06
achievement of risk management objectives.
5) The company has a clearly articulated risk 2.98
tolerance that is consistent with the goals and
resources of the firm and the expectations of the
board and other stake holders
4) Company's governance structure supports 2.98
effective risk management through board access,
authority
and
management
reporting
relationships for risk managers.
10) Risk management policies and procedures 2.92
are clearly stated and widely known.
11) Information on risk management is widely 2.87
communicated internally and externally to
company management and stakeholders.
14)
Risk management and monitoring is 2.81
independent from risk taking and management.
*-(The following scales are used to measure the respondents’
importance of corrective action.
Std.
Deviation
1.367
.987
1.385
1.396
1.287
1.183
1.394
1.538
1.328
1.316
1.161
perception on the
Mean scores ranging from 1.0 ≤ M < 1.8: Very low importance
Mean scores ranging from 1.8 ≤ M < 2.6: Low importance
Mean scores ranging from 2.6 ≤ M ≤ 3.4: Neutral
Mean scores ranging from 3.4 < M ≤ 4.2: High importance
Mean scores ranging from 4.2 < M ≤ 5.0: Very high importance)
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The key was adopted from Van Gruenen, Viviers and Venter (2011).
In Table 3, a test was conducted to establish whether there exists risk management
culture among Zimbabwean short-term insurance industry. The null hypothesis is
accepted in 80% of the cases above. Therefore the researcher concluded that there is a
risk management culture among Zimbabwean short term insurance companies. The
results for question 7 show that the risk management staffs in insurance companies are
not adequately qualified and this could have resulted from the brain drain that happened
in Zimbabwe during the economic crises. The results for question 12 highlight
respondents perceive that management in the insurance companies does not view its
risk management capabilities as providing a competitive edge. Such perceptions could
have arisen from the instances that the employees have encountered at their
companies.
Table 3: One sample test for risk management culture
Test Value = 3
Question
Sig.
(2- Significance
Test*
t
Df
tailed)
5
-.099 52
.922
0
6
.747
52
.458
0
7
2.512 52
.015
1
8
1.181 52
.243
0
9
.348
52
.729
0
10
-.414 52
.681
0
11
-.731 52
.468
0
12
2.922 52
.005
1
13
1.289 52
.203
0
14
-1.183 52
.242
0
*1= significant; 0= not significant
4.3 Risk Control
An important element of a successful company is its ability to identify sources of risk
effectively and develop tools to measure and manage those risks that it has identified.
A company that cannot measure its risks obviously cannot manage the risks. Risk
control is linked to the risk management culture. The opinions of the respondents on
the ability to implement appropriate mitigating actions and controls after identifying its
risks are presented in Table 4. From the evidence provided in Table 4, the means of the
items on risk control obtained a neutral mean score. Respondents are neutral in their
perceptions about the importance of corrective actions on risk control practices in their
companies. The individual responses to the questions on average were a little over one
point away from the mean.
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Table 4: Risk control
Mean*
19) Company has a process in place to see that risk
limits, management programs are followed as planned.
Exceeding limits has a clear, predetermined and effective
consequence.
3.15
17) The company has clearly documented limits and
standards for risk taking and risk management that are
widely understood within the company.
3.04
18) Company has clear programs in place that are
regularly used to manage the risks that the company
takes.
3.00
16) The company monitors all significant risks on a
regular basis, with timely and accurate measures of risk.
15) Management has identified all significant risk 2.98
exposures
2.85
Std.
Deviation
1.215
1.467
1.286
1.293
1.231
Table 5 shows that the null hypothesis of Zimbabwean short term insurance companies
having risk control measures is accepted at 5% level of significance. All the questions
are in support of the null hypothesis and hence a conclusion was reached that the
short-term insurers have risk control measures in place.
Table 5: One sample test for risk control measures
Test Value = 3
Question
Sig.
(2- Significance
Test*
T
df
tailed)
15
16
17
18
19
-.893
-.106
.187
.000
.904
52
52
52
52
52
.376
.916
.852
1.000
.370
0
0
0
0
0
*1= significant; 0= not significant
4.4 Extreme Event Management
Risk management is not complete if the practice only addresses risks that currently
affect the enterprise only. Effective risk management should also consider those risks
that could affect the enterprise in the future. Such risks are of low frequency but high
severity. Companies should have early warning sign systems for such risks. The risks
can include IT failure or a stock market crash and these catastrophe events have an
impact on a company’s reputation, liquidity and overall financial strength. Table 6
provide a summary of the descriptive statistics of opinions to the questions on extreme
event management. The respondents perceive the way their companies consider
extreme events like terrorism as an item of low importance of corrective measures.
Respondents are neutral in their perceptions about the importance of corrective
measures on the processes of envisioning the impact of likely disasters in their
companies. The responses to the questions are concentrated around the mean.
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Table 6: Extreme event management
Mean*
20) The company has a process of envisioning the
impact of likely disasters through stress testing and
scenario analysis.
2.63
21) The company has a consideration of terrorism,
natural disasters, an IT failure, a power failure, a stock
market crush, an interest rate spike etc, while including
a process of early warnings that could allow company
management to anticipate disasters, however short the
period of notice
2.52
Std.
Deviation
1.085
1.196
From Table 7, the null hypothesis that the Zimbabwean short-term insurers having
measures put in place to control extreme events fails in both cases; therefore the
researcher concluded that at 5% level of significance, Zimbabwean short-term
insurance companies have no measures in place to control extreme events.
Table 7: One sample test for control measures to deal with extreme events
Test Value = 3
Question
Sig.
(2- Significance
Test*
T
df
tailed)
20
-2.266 52
.023
1
21
-2.898 51
.006
1
*1= significant; 0= not significant
The results are new in the context of the Zimbabwean short-term insurance industry.
There are no prior studies carried out for risk management practices in Zimbabwe.
There is lack of qualified risk management staff and no awareness on the importance of
risk management which is inconsistent with the notion raised by (Santori 2009). Santori
(2009) argues that every employee must think of risk management which is not the
case in Zimbabwean short-term insurance industry. The situation for risk management
practices in short-term insurance industry in Zimbabwe is sub-optimal which is akin to
arguments presented in (Jabbour 2011). Although risk control measures are in place,
there are not sufficient to guard against extreme events. These extreme events can
bring an organisation down if not managed. Therefore short-term insurance companies
in Zimbabwe must have proper risk management measures as this is what
encompasses a good risk management (Standard and Poor 2005).
5. Conclusions and Recommendations
The first hypothesis was testing whether there is a risk management culture in the
Zimbabwean short term insurance companies. The findings of the study show that risk
management culture is there among insurance companies. However, the issue of
concern is that the respondents perceive the risk management staff in their companies
as lacking appropriate qualifications. Management does not view their risk management
capabilities as providing a competitive edge. The researcher concluded that there is a
poor risk management culture in the short-term insurance industry. In order for the
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companies to be able to effectively implement and benefit from ERM, there has to be a
strong risk management culture in the organisations. The second hypothesis was
testing whether insurance companies have risk control measures to manage the risks
that they are exposed to. The results confirm that there are risk control measures in
place. The researcher also tested a hypothesis to provide evidence whether the short
term insurers manage extreme events. The results showed that there were no
measures in place to manage such risks. The respondents expressed the process of
envisioning the impact of likely disasters through stress testing and scenario analysis as
a weakness were low importance for corrective measures is placed in their companies.
In light of the conclusions, recommendations are made to the regulator, education
sector and insurers. Firstly, the regulator must ensure short-term insurance companies
have risk management mechanism such as ERM. The mechanism will help strengthen
the financial position of insurers and hence protect the insured. The regulator has a role
to play in providing awareness on the importance of risk management to the insurance
industry. Additionally, the regulator might collaborate with educational institutions to
come up with a framework to increase awareness. Secondly, the education sector and
other training institutions have a role to come up with programmes on risk management
so as to equip insurance practitioners with the knowledge required to execute their
duties. Finally, insurers need to come up with internal measures which supplement the
regulatory requirements so as to control extreme events. This is motivated by the
inadequacy of current risk control measures to manage extreme events. The study
raises important research questions. These include what risk management programmes
are suited for short-term insurance companies in Zimbabwe? How Solvency II and ERM
can be implemented in Zimbabwe insurance industry? How regulators can ensure risk
management programmes are implemented? What skills should risk management
practitioners possess to effectively execute their duties?
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